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Week Ahead: time for Super Mario to show his hand?

Friday’s relief rally notwithstanding, eurozone debt markets have shown enough stresses to frighten policymakers worldwide.

 
Week Ahead: time for Super Mario to show his hand?

Investors are increasing looking to the new European Central Bank (ECB) president, Mario Draghi, to resolve Europe’s debt crisis, much as his Nintendo character namesake might use his plumbing skills to stop a blocked drain from exploding.

Friday’s retreat in Italian bond yields and the relief rally in equities notwithstanding, the plumbing of the eurozone debt markets has shown enough stresses – in France, Austria and Slovenia – to frighten policymakers worldwide.

It is doubtful whether the eurozone will be able to increase its bailout fund’s firepower by way of a guarantee, noted Lutz Karpowitz, strategist at Commerzbank. And for political and legal reasons, he adds, the International Monetary Fund will be unable to play ‘the role of knight in shining armour’.

And as Dominic Rossi, chief investment officer at Fidelity's equity unit, pointed out, the debt woes are likely to affect ‘core’ eurozone economies to the point that Germany is persuaded that ECB purchases of government bonds is the only solution left.

The only other outcome, he said, was that the Germans do not accept that solution at any cost – under which scenario investors should give ‘significant weight’ to the possibility of a break-up of the eurozone.

‘We are approaching the point where the ECB has to show its hand and accept its role as a lender of last resort,’ warned strategists at Credit Suisse in a note. ‘Yet, the question is how much further turmoil is required for it to do so.’

Easyjet earnings

In addition to the ever-deepening euro saga, investors will also have a flood of economic data and company news with which to contend.

Pork supplier Cranswick (CWK.L) is to publish interim results on Monday, as is Lonmin (LMI.L), the world’s third-largest platinum producer, while the eurozone will publish figures on industrial production.

On Tuesday, Premier Oil (PMO.L), real estate investment group British Land (BLND.L) and luxury goods firm Burberry (BRBY.L) are to release interims, and budget airline Easyjet (EZJ.L) is set to publish annual results.

Writing ahead of the earnings report from Easyjet, Edward Stanford, analyst at Oriel Securities, said upbeat profit from rival Ryanair this week should provide some comfort that the yield environment for the sector is still ‘helpful’.

Meanwhile, official data on UK inflation and German economic sentiment are due. Markets will also scrutinise reports on the eurozone’s gross domestic product and US retail sales for signs that developed economies are sliding back into recession.

BoE inflation report due

Inter-dealer broker Icap (IAP.L) is set to release interims on Wednesday, as is the London Stock Exchange (LSE.L) and publisher Reed Elsevier (REL.L), while figures on UK jobs and US inflation are due. The Bank of England is also to publish its quarterly inflation report, as consumer prices continue to climb.

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